Mortgage Servicing Rights

9 Months Ended

Sep. 30, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Mortgage Servicing Rights

11) Mortgage Servicing Rights

The Company initially records its MSRs at fair value as discussed in Note 8.

After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.

The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance.

The Company periodically reviews the various loan strata to determine whether the value of the MSRs in each stratum is impaired and likely to recover. If the Company deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

The following table presents the MSR activity:

	As of September 30, 2023			As of December 31, 2022
Amortized cost:
Balance before valuation allowance at beginning of year	$	3,039,765		$	53,060,455
MSR additions resulting from loan sales (1)		907,546			10,243,922
Amortization (2)		(452,588	)		(9,078,706	)
Sale of MSRs		-			(51,185,906	)
Application of valuation allowance to write down MSRs with other than temporary impairment		-			-
Balance before valuation allowance at end of period	$	3,494,723		$	3,039,765
Valuation allowance for impairment of MSRs:
Balance at beginning of year	$	-		$	-
Additions		-			-
Application of valuation allowance to write down MSRs with other than temporary impairment		-			-
Balance at end of period	$	-		$	-
Mortgage servicing rights, net	$	3,494,723		$	3,039,765
Estimated fair value of MSRs at end of period	$	5,012,375		$	3,927,877

(1)	Included in mortgage fee income on the condensed consolidated statements of earnings
(2)	Included in other expenses on the condensed consolidated statements of earnings

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

11) Mortgage Servicing Rights (Continued)

The table below summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the Company’s assumptions in its September 30, 2023 valuation of MSRs. The assumptions used in the following table are likely to change as market conditions, portfolio composition and borrower behavior change, causing both actual and projected amortization levels to change over time.

	Estimated MSR Amortization
2023		351,687
2024		317,526
2025		293,311
2026		265,639
2027		240,113
Thereafter		2,026,447
Total	$	3,494,723

The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Contractual servicing fees	$	249,050	$	4,644,397	$	892,668	$	13,845,626
Late fees		21,037		107,219		84,358		288,854
Total	$	270,087	$	4,751,616	$	977,026	$	14,134,480

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio.

	As of September 30, 2023		As of December 31, 2022
Servicing UPB	$	411,911,166	$	360,023,384

The following key assumptions were used in determining MSR value:

	Prepayment Speeds		Average Life (Years)		Discount Rate
September 30, 2023		8.00		8.59		12.22
December 31, 2022		8.12		8.49		11.95

On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased $51,185,906 and generated a gain of $34,051,938 included in mortgage fee income on the consolidated statements of earnings. Substantially all the consideration was received by the Company with the remainder subject to certain holdbacks during transfer of the MSRs. The Company completed the physical transfer of files prior to its deadline. The holdbacks have been received in 2023.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)